Business Entity Comparison

Everything from day-to-day operations to taxes and how much of your personal assets are at risk is influenced by the business structure you choose. You should select a business structure that provides you with the appropriate balance of legal protections and benefits.



One-person business

A Sole proprietorship is simple to set up and offers you total control over your company. If you conduct business but don't register as another kind of company, you're automatically deemed a sole proprietorship.

Sole proprietorships do not have their own legal entity. This implies that your company's assets and obligations aren't distinct from your personal ones. You may be held personally responsible for the company's debts and obligations. A trade name may still be obtained by sole owners. Because you can't sell shares, it may be difficult to obtain funds, and banks are reluctant to lend to sole proprietorships.

For low-risk companies and entrepreneurs who wish to test their company concept before establishing a more formal business, sole proprietorships may be a suitable option.

Partnership

The most basic form for two or more individuals to own a company jointly is a partnership. Limited partnerships (LP) and limited liability partnerships (LLP) are the two most frequent types of partnerships (LLP).

Only one general partner has unlimited responsibility, while the other partners have limited liability. Limited-liability partners also have limited authority over the business, which is formalized in a partnership agreement. Profits are passed through to individual tax returns, and the general partner — the partner with unlimited liability — is responsible for self-employment taxes.

Limited liability partnerships are similar to limited partnerships in that each owner has limited responsibility. Each member of an LLP is protected from obligations owed to the partnership, and they are not liable for the conduct of other partners.

Partnerships are an excellent option for companies with many owners, professional organizations (such as lawyers), and those looking to test a business concept before establishing a more formal company.

Limited Liability Corporation (LLC)

You may benefit from the advantages of both the corporation and partnership company forms by forming an LLC.

In most cases, LLCs shield your personal assets, including your car, home, and savings accounts, from personal responsibility. If your LLC goes bankrupt or is sued, your personal assets, such as your car, house, and savings accounts, are not in danger.

Profits and losses may be transferred to your personal account without incurring company taxes. Members of an LLC, on the other hand, are deemed self-employed and must pay self-employment taxes to Medicare and Social Security.

In many states, LLCs have a finite lifespan. When a member joins or quits an LLC, certain states may require the LLC to be disbanded and re-formed with new membership unless the LLC already has a buy-sell-and-transfer ownership agreement in place.

LLCs are a suitable option for medium-and higher-risk companies, owners with substantial personal assets who wish to safeguard them, and owners who want to pay a lower tax rate than they would if they ran their company as a corporation.

Corporation / C-corporation

A corporation, often known as a C corporation, is a legal entity distinct from its owners. Corporations may profit, pay taxes, and be held legally responsible.

Corporations provide the best protection from personal responsibility for their owners, but they are more expensive to establish than alternative forms. Corporate record-keeping, operating procedures, and reporting are also more comprehensive.

Corporations, unlike single proprietors, partnerships, and limited liability companies, pay income tax on their earnings. Corporate earnings are often taxed twice: first when the business earns a profit, and again when shareholders get dividends on their personal tax returns.

Corporations have a totally distinct existence from their stockholders. If a shareholder quits or sells his or her shares, the C corporation may continue to operate largely unaffected.

When it comes to generating money, corporations have an edge since they may do it by selling shares, which can also help them attract workers.

Corporations are a suitable option for medium-and higher-risk enterprises, as well as those that need to generate funds or intend to "go public" or be sold in the future.

S-corporation

An S corporation, often known as an S corp, is a unique form of company created to avoid the double taxation disadvantage that ordinary C corporations face. Profits and losses from S corporations may be transferred to owners' personal income without ever being subject to corporate tax rates.

Although not all states tax S corporations equally, the majority do so in the same manner as the federal government and tax their shareholders proportionately. Some states tax S corporations on earnings above a certain threshold, while others ignore the S corporation election entirely, treating the company as a C corporation.

S corporations must apply for S corporation status with the Internal Revenue Service, which is a separate procedure from registering with their state.

The S corps has its own set of restrictions. S corporations are limited to 100 stockholders, all of whom must be citizens of the United States. You'll still have to follow the C corporation's rigorous filing and operating procedures.

S corps, like C corps, have an autonomous existence. If a shareholder quits or sells his or her shares, the S corporation may continue to operate largely unaffected.

S corporations are an excellent option for companies that would normally be C corporations but satisfy the requirements to register as an S corporation.

B corporation

A benefit company, often known as a B corporation, is a for-profit organization recognized by the majority of states in the United States. B corporations vary from C corporations in terms of purpose, responsibility, and openness, but not in terms of taxation.

B corps are motivated by both a sense of purpose and a desire to make money. Shareholders want the business to provide some kind of public benefit in addition to financial profit. B corporations are required by certain jurisdictions to file yearly benefit reports demonstrating their contribution to the public welfare.

There are many third-party B corporation certification services available, but none are needed for a business to be legally classified as a B corporation in a state where the status is accessible.

A close partnership

Close companies are similar to B corporations but have a different corporate structure. These remove many of the procedures that regulate corporations and apply to smaller businesses.

State regulations differ, but most shares are not available for public trade. Without a board of directors, close companies may be managed by a small number of shareholders.

Non-profit organization

Nonprofit organizations are formed to carry out charitable, educational, religious, literary, or scientific activities. Nonprofits may get tax-exempt status since their work helps the public, which means they don't have to pay state or federal income taxes on any profits they earn.

Nonprofits must submit a tax exemption application to the IRS, which is distinct from registering with their state.

Nonprofit companies must adhere to the same organizational requirements as a normal C company. They must also adhere to certain guidelines on the disposition of any earnings they generate. They can't, for example, provide earnings to members or political campaigns.

Nonprofits are often referred to as 501 (c) (3) companies, after the provision of the Internal Revenue Code that grants tax-exempt status.